EMU CommentInflation weaker than expected; but seasonal distortions

Eurozone flash annual consumer price inflation slowed a notch more than expected to 1.2 percent y-o-y in April (but in line with our estimate), from previously 1.4 percent. While food and energy price inflation rose, service inflation decreased markedly to 1.0 percent y-o-y in April (previously 1.5 percent y-o-y). This meant that annual core HICP inflation fell to a meagre 0.7 percent (previously 1.0%). This mainly reflects an Easter effect stemming from a steep increase in April last year, which will likely reverse in May. Accordingly, we expect the base effect to push up inflation further in the following two months (see graph). This will likely strengthen signs that inflation is continuing to rise, albeit at a gradual and bumpy pace.

Might delay next exit step from the ECB

Today’s weak inflation numbers likely add to the ECB’s caution and patience. But we believe that just like the growth outlook, we will see an improvement after a soft period so far this year. We expect the ECB's confidence in inflation rising toward the aim to be intact, but some people might doubt whether this confidence can strengthen sufficiently to make the ECB take another small step in its exit communication at the June meeting. We will only get one more CPI reading before then. This might be the case, but then the ECB will probably take the step at the July meeting anyway, likely not postponing the overall exit plan after all.